SEC Issued Joint Report on International Swap Regulation

Securities and Exchange Commission (SEC), capital market regulator of United States issued "Joint Report on International Swap Regulation" in line of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

SEC has quoted in the report that effectively regulated financial markets are a necessary component of a strong economy. When the financial system failed three years ago, over-the-counter (“OTC”) derivatives were unregulated, and financial systems and participants were interconnected to a greater extent than ever before. The global nature of OTC derivatives requires comprehensive international cooperation and coordination.

Efforts to regulate OTC derivatives are under way in the United States and abroad. The financial crisis of 2008 has led to broad international consensus on the need for improved transparency, mitigation of systemic risk, and protection against market abuse, and extraordinary coordination on how best to achieve sound regulation appropriately tailored to the OTC derivatives market.

Jurisdictions with major OTC derivatives markets have taken steps toward regulating OTC derivatives – with variance in pace, but with consistency among many of the ultimate policy goals. In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) provides the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC” and, together with the CFTC, the “Commissions”) with the authority to regulate certain types of derivatives that currently are entered into bilaterally and that typically are not cleared. Subject to certain exceptions, Title VII of the DFA (“Title VII”) requires the CFTC to regulate those derivatives defined as swaps, and requires the SEC to regulate derivatives defined as security-based swaps. The Commissions are in the midst of promulgating regulations to implement this statutory mandate.

DFA Section 719(c) requires the Commissions jointly to conduct a study (“Study”) and then to report to Congress (“Report”) on how swaps and security-based swaps (collectively “Swaps”, unless otherwise indicated) are regulated in the United States, Asia, and Europe and to identify areas of regulation that are similar and other areas of regulation that could be harmonized. Section 719(c) also calls for the Report to identify major dealers, exchanges, clearinghouses, clearing members, and regulators in each geographic area and to list the major contracts (including trading volumes, clearing volumes, and notional values), the methods for clearing swaps, and the systems used for setting margin in each geographic area.

The Study is one facet of the CFTC’s and the SEC’s work in analyzing the international context and implications of the DFA. Congress directed the Commissions (and prudential regulators) in Section 752(a) of the legislation to “as appropriate . . . consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation … of swaps, security-based swaps, swap entities, and security-based swap entities” in order to “promote effective and consistent global regulation of swaps and security-based swaps”.

This Report includes four sections. Section I discusses the Congressional mandate for the Study and Report, including the process and approach used by CFTC and SEC staff. Section II describes the regulatory framework for OTC derivatives in the Americas, European Union, and Asia, and Section III analyzes the similarities and differences across jurisdictions, discusses potential areas for harmonization, and makes recommendations for next steps.10 Finally, Section IV provides the conclusion of the Study and Report.